Euro Pulls Back after Italian PM Signals No ECB Bond-Buying

A soft open to the beginning of the week comes on the heels of some tenuous commentary by Italian Prime Minister Mario Monti, who suggested that Italy has no interest in participating in the European Central Bank’s bond-buying program. "Italy would not accept conditions beyond those already agreed and which we are already respecting," said Italian PM Monti during closed-door meeting in Italy today.

These comments come after ECB President Mario Draghi said last week that “Under appropriate conditions, [the ECB] will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.” Perhaps that first portion of the phrase was more important than market participants initially interpreted, “under appropriate conditions.”

Whatever those conditions may be, they’re not good enough for Italian PM Monti and thus bring our focus to Spanish PM Mariano Rajoy. Since Spanish accepted international funding for its trouble banks back in June, rumors have been afoot that a full-blown sovereign bailout would be necessary for the Euro-zone’s fourth largest country (a view maintained here as well). But as Spanish borrowing costs fell through late-July and the entirety of August, this pressure to seek a bailout – and all of the terms and conditions that come with it – was very-much relieved; why bother to implement unpopular reforms (austerity, see: Greece) that could stir further social unrest if there’s no pressing need?

Herein lays the rub about the ECB program: while the safety net is in place, there is definitely a cost that comes with it. It seems that the Bundesbank, deemed ‘dead’ after Thursday, may have the last laugh as the framework by which Italy and Spain can receive support doesn’t look palpable to political leaders unwilling to sacrifice popularity for the sake of the necessary structural reforms that could ease the crisis over the long haul.

Taking a look at credit, bond markets are already giving back some after Italian PM Monti’s comments. The Italian 2-year note yield has increased to 2.330% (+17.2-bps) while the Spanish 2-year note yield has increased to 2.647% (+4.8-bps). Similarly, the Italian 10-year note yield has increased to 5.122% (+9.7-bps) while the Spanish 10-year note yield has decreased to 5.520% (-5.2-bps); higher yields imply lower prices.

There’s barely anything on the economic docket today in the North American trading session, with the USD Consumer Credit (JUL) report coming out at 15:00 EDT / 19:00 GMT. Aside from this one release, our focus largely lies on commentary out of Europe now that the ECB has placed the proverbial ball back in the court of politicians.

TECHNICAL OUTLOOK

BB represents Bollinger Bands ®

EURUSD: The EURUSD made a huge technical breakthrough on Friday by shattering a yearlong descending trendline off of the August 2011 and October 2011 highs. This now marks the potential for a long-term bottom at the 1.2040/45 low. Additionally, while our bias for a move towards 1.1500 by November 1 is negated, a weekly close back within the channel – back below 1.2620/35 (former yearly low set in January) – would suggest a false breakout has occurred. Near-term resistance comes in at 1.2820/25 (late-May swing highs) and 1.2980/1.3000. Support comes in at 1.2740/50, 1.2620/35, 1.2500/10, and 1.2460/80.

USDJPY: Weak US jobs data on Friday stung the pair, dropping to back to key 78.10/20 support, an area that has held since the beginning of August. 78.60 remains our line in the sand for bullish/bearish price action: a daily close above 78.60 suggests a move back towards 79.15/30 (100-DMA, 200-DMA, descending trendline off of the April 20 and June 25 highs); a daily close below 78.60 keeps 78.10/20 in focus, while penetration of the August low at 77.90 will likely result in a washout to new lows with the potential for 77.65/70 and 77.30.

GBPUSD: The GBPUSD has steadied after breaking topside channel resistance last week, sitting at the psychologically significant 1.6000 exchange rate. As long as price on the daily chart is supported by 1.5930/40, there’s reason to believe that a run up to 1.6120/40 is possible during September. Above 1.6120/40, the former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus; this would also represent a break of the descending trendline off of the April 2011 and August 2011 highs. Below 1.5930/40, near-term support comes in at 1.5860/75 (ascending trendline off of August 2 and August 31 lows), 1.5770/85 (late-August swing lows), and 1.5700.

AUDUSD: The AUDUSD has pulled back to respect a former channel, reversing some of its gains on the Chinese stimulus measures announced last week. Accordingly, topside resistance comes in at 1.0350/55 (20-DMA), 1.0365/70 (channel resistance) and 1.0410/20 (mid-August swing lows). A breakdown eyes 1.0275/1.0300, 1.0210/25, and 1.0160/75 (weekly low).